The euro zone faces a defining moment on Sept. 7 when a German court rules on the legality of bailouts that many Germans abhor and a few think are unconstitutional.
While almost no legal expert or European economist thinks the plaintiffs will score an outright legal victory, observers say the case highlights the political turmoil that is pitting euro-skeptics against those who think bailouts to debt-challenged countries like Greece, and eventual fiscal integration, are the best way to save the 17-country euro zone from economic suicide.
That turmoil, they say, is making a bad situation worse. “Politics, particularly German politics, has been a major impediment toward achieving a … more sustainable long-term solution to the euro zone’s institutional problems,” said Marshall Auerback, global portfolio strategist at Denver hedge fund Madison Street Partners.
Political tensions are rising as the debt crisis enters its third year, with no end in sight. In the autumn of 2009, it was apparent that Greece, which had been fudging its budget deficit figures for years, would require a bailout.
The Greek bailout did not arrive until May, 2010, because of bickering, especially within Germany, about the wisdom of saving countries that were considered the authors of their own misfortunes.
There is no doubt that Greece’s bailout would have been less costly had it happened sooner. Since then, there has been endless debate about the size, shape and scope of future rescue missions, the firefighting role of the European Central Bank and, crucially, whether euro bonds – bonds backed by all euro zone countries – would be a move too far.
Germany’s top court, the Federal Constitutional Court, is to rule on whether the government, led by Chancellor Angela Merkel, broke any laws when Germany sponsored the bailouts of Greece, Ireland and Portugal. As Europe’s biggest and wealthiest economy, it is on the hook for about one-quarter of the total bailout bill, which so far totals almost €300-billion ($420-billion).
The court is considering three lawsuits brought by six euro-skeptics – five academics and a lawmaker from the Bavarian sister party to Ms. Merkel’s Christian Democrats. They argue that the bailouts violated property rights and broke the “no bailout” clause in the European Union’s treaty. The clause was designed to ensure that member countries keep their financial houses in order; it failed miserably.
The chances that the plaintiffs will get their way appear slim, though some German legal experts think the court could set conditions for future German participation in bailouts, such as giving the Bundestag (the German parliament) more say in approving or modifying them.
“My sense is that [the verdict]will not be one that unravels the whole euro zone,” said Jens Larsen, chief European economist in London for RBC’s investment arm. “It’s just all part of the political debate and shows that, for example, the whole issue of euro bonds will be politically hard to accept.”
In Germany, Ms. Merkel is fighting a delicate political war as she tries to balance her desire to keep the euro zone intact, which means deploying massive amounts of taxpayers’ money into the bailout funds, with her need to not alienate the taxpayers who object to paying the bill for costly, and perhaps doomed, sovereign rescue efforts. It hasn’t worked well. Ms. Merkel has been accused by other euro zone leaders of waffling and her popularity in Germany is sinking.
In effect, recent local elections have been acting as referendums on her stance on bailouts. She supports handing over money as long as the profligate countries adopt strict fiscal controls. But, in a nod to the euro-skeptics, she does not support euro bonds, which implies a fiscal union that she thinks will not fly with voters. (The opposition Social Democrats support euro bonds and adding more firepower to the European rescue fund.)
Ms. Merkel’s ruling coalition has lost six state elections this year, including one Sunday in her home state of Mecklenburg-Western Pomerania. She has blamed the Christian Democrats’ May defeat in the state of North Rhine-Westphalia on the unpopularity of the Greek bailout. While campaigning last month in another state election, she tried to gain voter support by urging spending discipline. “You know very well how things work here, how local government has to save, that one can’t afford everything and naturally that applies to all of Europe,” she said at a rally.
Ms. Merkel faces national elections in 2013. If recent polls are to believed, she would not win. An August poll done by TV network ARD said that 20 per cent of Germans have “no faith” in her ability to handle the financial crisis, while 55 per cent have “little faith.” Support for her ruling coalition was at 34 per cent, off its lows but still less popular than the combined popularity of the Social Democrats and Greens (a probable coalition if Ms. Merkel’s party were to lose).
This week’s court verdict, whatever the outcome, will place attention on Germany’s polarized views on the bailouts while highlighting the lack of consensus on how to save euro zone economies and prevent contagion. “I think you’ll continue to see acute and painful market disruptions that will add to the euro zone’s mounting problems, with the systemic issues exacerbating the deteriorating economic conditions,” Mr. Auerback said.
BY THE NUMBERS
Proportion of Germans who have “no faith” in Angela Merkel’s ability to handle the European financial crisis
Estimated cost of bailing out Greece, Ireland and Portugal to date
Year-over-year growth in German GDP
Year-over-year shrinkage in Greek GDP